Waves of transformation

Karim Chedid:
Hi and welcome to Around the World Spotlight on our Q4 outlook for the final quarter of this eventful year, we are focused on two stories. First, the rate cut positioning and the opportunity to lock in income and fixed income while yields remain at elevated levels. And second leaning into equity breadth with a quality focus that goes beyond the technology sector.

We remain pro risk, but see macro data and markets staying volatile into year end and geopolitical risks remaining structurally higher, calling for a selective approach as we navigate the opportunities and risks ahead, I am joined by the BlackRock Investment Institute's Nathalie Gill, who will go through our key investment themes for the remainder of this year. And I'll then look at what these themes mean for your portfolios.

Natalie Gill:
Thanks, Karim. Since our last update, mid-year equities have continued to do well, but it's not been a straight line up with us. Recession fears and positioning unwinds, triggering bouts of volatility. We could see more flare ups ahead of the US presidential election. We move from a US tech focus within our equity overweight now leaning into a wider set of opportunities.

US earnings growth broadening beyond early winners is a sign the economy is more resilient. The markets are pricing. While the Fed has begun its easing cycle, we don't see it cutting policy rates as sharply as markets expect limited by sticky inflation. And we go underweight US short dated treasuries. We prefer medium term treasuries and quality credit. Our first investment theme is getting real.

We see big opportunities in the real economy as investment flows into infrastructure, energy systems and technology. We think companies may need to revamp business models and invest to stay competitive. For investors, it means company fundamentals will matter even more. A second theme is leaning into risk. The answer to a highly uncertain outlook is not simply reducing risk. We look for investments that can do well across scenarios.

This year, a concentrated AI scenario has played out where a handful of AI winners is keep driving stocks into year end. We still favor the AI theme, yet evolve our exposure. We think patience is needed as the AI build out still has far to go, but the sentiment shift on AI capital expenditure could weigh on valuations. So we broadened exposure to energy and utilities companies providing key AI inputs and real estate and resource companies tied to the build out.

We stand ready to adapt as and when another scenario potentially suddenly becomes more likely. So our third theme is spotting the next wave. This is about being dynamic and ready to overhaul asset allocations when outcomes and investment opportunities can be vastly different.

Karim Chedid:
Thanks, Natalie. So what does this mean for investors portfolios? We lean into equity breadth by building exposure to the equal weight of the S&P 500, but we are keeping quality at the core with a preference for high conviction unconstrained and equity strategies. We look to position for global easing cycles in equities through exposures to the utility sector and maintain our preference for selective approach to stocks outside the US, eyeing opportunities in Europe in particular.

But selectively we look to infrastructure buoyed by the AI build out and supportive policy in fixed income developed markets. Easing cycles call for locking in income now while rates remain elevated and we see fixed maturity bond products as a key tool to achieve this, we prefer euro exposure in government bonds and feel more comfortable extending duration in Europe than in the US, with the ECB likely to cut faster than is expected by markets over the medium term.

In our view, we also favor euro exposures and credits where we look up in quality. Overall, we see scope for further allocation to fixed income in portfolios because our analysis of client positioning shows EMEA investors remain undereducated to duration exposures across the risk spectrum. Finally, looking to the whole portfolio, we see scope to dial up exposure to alternative assets.

We look to liquid alts and multi asset strategies for better potential risk adjusted returns and favor dividend stocks using high quality alpha strategies as a source of income. We look to gold as a hedge against elevated geopolitical risk and private markets as an opportunity to unlock stable returns with potential diversification benefits. Read more on our views and our latest investment directions report. And thank you for joining.